...Taylor Scott 1/28/13 Warren Buffett Case Analysis By analyzing the financial statements and Warren Buffett’s unique investment philosophy, the problem that must be answered is whether the acquisition of PacifiCorp increased Berkshire Hathaway’s intrinsic value. Buffett has a very unique way of measuring intrinsic value that would make it slightly more difficult to determine if this acquisition did, in fact, make Berkshire Hathaway more profitable. According to Warren Buffett, intrinsic value is “per-share progress”. Buffett assessed intrinsic value as the present value of future expected performance. For historical reference, Berkshire Hathaway has been outperforming the market since its inception in 1965. In 1977, the firm’s year-end closing share price was at $107. Fast-forward to May 24, 2005 and the closing price on BH’s Class A shares reached $85,500. Berkshire has had an annual increase of wealth of 24% since 1965, which is more than double the 10.5% of the average increase for other large stocks. It started out with a decline due to factors such as inflation, technological change, and competition from foreign competitors, but has come back strongly since it closed the textile side of its business operations. Most of this success can be attributed to Warren Buffett and his very unique investment philosophy that can be viewed very differently by many in the same field. According to the case, on the announcement day of the acquisition, Berkshire Hathaway class A...
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...Hathaway dan Scottish Power pada hari pengumuman akuisisi. Harga penawaran untuk PacifiCorp adalah $ 9,4 miliar, dimana Berkshire membayarnya dengan kas sebesar $ 5,1 miliar dan sisanya menggunakan hutang dan saham preferen senilai $ 4,1 miliar. Dampak dari pengumuman tersebut adalah naiknya harga saham kelas A Berkshire Hathaway sebesar 2,4%. Dari sudut pandang Berkshire dan investor lainnya, akuisisi MidAmerican terhadap PacifiCorp dapat memberikan potensi perkembangan yang baik sehingga tak heran berita ini memperoleh respon positif, menyebabkan harga saham Berkshire sebagai holding company MidAmerican mengalami kenaikan harga saham. Berkshire percaya bahwa PacifiCorp dapat memberikan keuntungan produktif di masa depan. Dari sudut pandang Buffet yang menganut prinsip value-investing, nilai intrinsik PacifiCorp tentu lebih tinggi dibanding biaya $ 9,4 miliar yang dikeluarkan. Metode valuasi berdasarkan market multiple untuk perusahaan sebanding, dapat dilihat bahwa rentang Enterprise Value yang mungkin untuk PacifiCorp adalah membentuk antara $ 6,252 miliar sampai $ 9,289 miliar. Sedangkan rentang market value of Equity yang mungkin adalah antara $ 4,277 miliar sampai $ 5,904 miliar. Dalam kasus ini, Berkshire lewat MidAmerican mengakuisisi PacifiCorp dengan harga $ 9,4 miliar. Harga tersebut berada diluar rentang enterprise value maupun market value of equity yang dihitung berdasarkan market multiple. Hal ini tentu akan menimbulkan pertanyaan, mengapa Berkshire bersedia untuk membeli...
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...Matt Olbrantz ENGM 5550 2/08/2011 Interim Assignment #2-Case Study; Warren Buffett It was apparent at a young age that Buffett was destined for success. His parents, grandparents knew he was a gifted as a child and eventually would turn into something great. He had something that no one else had, a savvy for business ethics and profit. It is incredible to me that by the time Buffett finished high school he had $6,000 in savings. And even more incredible to have almost $10,000 by the time he got out of college. Buffett took what he learned as a young boy about selling everyday items like gum and used the same philosophy in making billions in the stock market. As a young boy shades of brilliance were apparent, selling lemonade, bubble gum, then the purchase of pin ball machines for use in barber shops and then selling them for a profit. Buffett began trading stocks at a young age with success. It was obvious Buffett knew what he was doing as an adolescent and I think this set the foundation’s for his strategies later in life. It also shows that he would not invest something he was not familiar with. Who is not familiar with gum, lemonade and pin ball as a kid?? Warren Buffett was first exposed to formal training in investing at Columbia University, where Buffett studied under Prof. Ben Graham. Graham developed a method that identified undervalued stocks and this was Buffett’s cornerstone approach of what is now called “valued investing”...
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...Warren Buffet I. Point of View Warren Buffet – CEO of Berkshire Hathaway II. Statement of the Problem Warren Buffet’s decision to acquire GEICO at a 26% premium compared to the market price. III. Objectives a. To be able to understand the issue of the case. b. To be able to come up with a recommendation to help the company’s decision. IV. Areas of Consideration * Buffett’s investment philosophy. Buffett’s considerations for investment give a unique outlook. By reviewing his checklist, we attempt to gain insight as to why such a premium is included in the GEICO offer. * Review of Warren Buffett’s investment record. While our analysis lends credence to the bid price of $70 per share for GEICO, we also examine the historical record of Warren Buffett. Buffett’s investment success may add to shareholder’s comfort, as his track record is remarkable when compared to broader market results. * GEICO Corporation’s performance. * Geico had paid an increasing dividend each year. * Geico was the seventh largest auto insurer in the United States. * The firm was the lowest-cost insurance provider in the industry. * Geico’s share price had been hammered by double-digit inflation, higher accident rates, and high damage awards. V. Alternative Courses of Action 1. Accept: The acquisition of GEICO at a premium. Advantages: * It would encourage a positive public interest * It would create an increase in company’s value ...
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...CASE#1 Abstract: Warren E. Buffett, 2005 On May 24, 2005, the MidAmerican Energy Holdings Company (a subsidiary of Berkshire Hathaway) would acquire the electric utility PacifiCorp. M would purchase P with $5.1 billion in cash and $4.3 billion in liabilities and preferred stock. MidAmerican is a leader in the production of energy from diversified sources; it is also the owner of the second-largest full-service independent real estate brokerage in the US. Until March 2002, Berkshire has acquired a 9.9% voting interest and an 83.7% economic interest in the equity of MidAmerican. By 2004, Berkshire has always announced and emphasized that it is the time to take some action (acquisition) and to find the “elephant” to make one significant gain. The acquisition of PacifiCorp thus was a good investment target. First of all, PacifiCorp is a leading, low-cost energy producer and distributor which served 1.6million customers in six states in the western US. It has a strategic fit with MidAmerican. Now the main issues are to measure the bid price and future benefits to see that whether this acquisition can fit the criteria of Berkshire – long-term goal of a 15% annual growth rate in intrinsic value. PS: Long-term economic goal is to maximize Berkshire's average annual rate of gain in intrinsic busn value on a per-share basis. We do not measure the economic significance or performance by its size; but by per-share progress. The rate of per-share progress will diminish in the future - a...
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...Case 2: Warren E. Buffett. Berkshire Hathaway Question 1: The possible meaning of the change in the stock price of Berkshire Hathaway on the day of the announcement is that the shares of GEICO were undervalued at a price of $55,75 and Berkshire Hathaway paid a $14,25 premium per share. However, even though Berkshire Hathaway paid $70 per share, that price was lower than the fair value of GEICO but the shareholders couldn’t turn the offer down. Consequently, Berkshire Hathaway increased it’s market value by $718 millions because the intrinsic value of GEICO was higher than the price it was sold for. The company had outstanding 1,177,750 shares and on august 25 BH share price changed by positive $609.60. At the end of the session, the price was $25,400. 1,117,750 * 609.60 = 717,956,400 gain. In addition, BH already owned 50.4% of GEICO. GEICO had on april 30 1995 a total of 67,889,574 shares outstanding. BH is buying 49.6% of the total outstanding shares: 67,889,574 * 49.6% = 33,673,229 shares Before the acquisition, BH had a value of Total shares * opening price 1,177,750*24,790.40= $29,196.89 million And GEICO had a value of 33,673,229*55.75=$1,877.28 million Resulting to the BH+GEICO = 29,196.89+1,877.28 = $31,074.17 million After the acquisition, BH had a value of Total shares*closing price 1,177,750*25,400= $29,914.85 million And GEICO had a value of 33,673,229*70=$2357.13 Resulting to the total BH+GEICO = 29,914.85+2357.13 = $32,271.98 million and...
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...ITESM Dirección Financiera Mariana Soto Giraldo A01324999 ------------------------------------------------- WARREN BUFFET Biography American business magnate, investor and philanthropist. The most successful investor in the world. Chairman, CEO and largest stakeholder of Berkshire Hathaway. He studied at Columbia University. Trained in investing by professor Benjamin Graham, who’s the coauthor of Security Analysis (Method of identifying undervalued stocks, P<Intrinsic Value). Graham | Buffet | Focus on the value of assets such as: cash, net working capital and physical assets. | + Also on valuable franchises that were unrecognized by the market. | Berkshire Hathaway American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States. - 1965-1995 Compound Annual Growth Rate: 24% - May 24, 2005 Announcement of the acquisition of Pacific Corp (electric utility) by Mid American Energy Holdings Company (subsidiary). - 2004 Portfolio of businesses included: insurance, apparel, building products, finance and financial products, flight services, retail, grocery distribution and carpet and floor coverings. Buffet investment philosophy: 1) Economic reality not accounting reality Long-term prospects based on the quality of management and the firm’s capacity to create value. 2) The cost of the lost opportunity Analyzing and comparing an investment opportunity with the second alternative (the lost one). 3)...
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...Warren Buffet Warren Buffet was born August 30, 1930 in Omaha, Nebraska. He lived much of his life in Nebraska and later moved to Washington D.C. At 11 he purchased his first stock which he ended up making a five-dollar profit on this investment. He got his bachelors degree from The University of Nebraska. For some time he attended Wharton’s School of Finance at the University of Pennsylvania. This institution is rated as one of the top five business schools in the nation. His Masters of Science in Economics was completed at Columbia University.... [tags: Berkshire Hathaway] 338 words (1 pages) FREE Essays [view] Warren Buffet - Warren Buffet Warren Buffet of Berkshire Hathaway and His Investment Strategy Warren Buffet is arguably the most successful investor of all time. His initial investment of $105,000 in the beginning, ultimately grew into a $16 billion dollar fortune made from his trading company, Berkshire Hathaway. If you had invested $10,000 in Berkshire Hathaway when he took over the company in 1965, it would be worth $22,000,000 today. Warren’s stockpicking prowess however, is what he is know for and is also why Berkshire Hathaway has had a returning average of 24% a year for the last three decades.... [tags: GCSE Business Marketing Coursework] :: 3 Sources Cited 551 words (1.6 pages) $14.95 [preview] Case Study of Warren E. Buffet - Case Study of Warren E. Buffet In 1995 Berkshire Hathaway has made a bid for the shares of GEICO. This report reviews the...
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...Case Study of Warren E. Buffet In 1995 Berkshire Hathaway has made a bid for the shares of GEICO. This report reviews the offer made by Warren Buffet and will try to prove that the acquisition of GEICO will serve the long-term goal of Berkshire Hathaway and the bid price was appropriate. Furthermore, it will explain what may have caused for the share price increase for Berkshire Hathaway at the announcement of GEICO’s acquisition. Would the GEICO acquisition serve the long-term goals of Berkshire Hathaway? In 1976, Warren Buffet paid $45.7 million for 34.25 shares of GEICO. Review of GEICO’s historical dividends shows that GEICO has been a very profitable investment for Berkshire Hathaway. The growth rate for 1994 is a sharp increase, but even if the growth rate for 1994 is not considered, GEICO’s historical increase in dividends has been considerably high so that acquisition of GEICO will serve the long-term goals of Berkshire Hathaway. What might account for the share price increase for Berkshire Hathaway at the announcement? Review of Warren Buffet’s historical investment success might explain the increase in share price for Berkshire Hathaway at the announcement. Given that he has had a good track record, it is expected that shareholders respond positively. In 1977, the price of Berkshire Hathaway was $89 closing at $25,400 by 1995, an unparalleled annual growth of 37.7%. In comparison, the growth rate of the S&P...
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...decisions. For example, a husband and wife investing in a company based off of the financials provided by the accountant in order to save money for their son’s college fund. If they are provided with financials that make the company look more profitable than it truly is because the accountant cooked the books, then this family is entering into a dangerous investment that could ruin their son’s college fund and his future education. This shows the level of responsibility and ethical decision making that accountants are faced with. As a recent graduate of Providence College with an undergraduate in Accounting, I landed a job with a small automobile company. It is midnight and my boss is looking to sell the company. He has a meeting with Warren Buffet at 9a.m. tomorrow morning and has asked me to provide a spreadsheet with the company’s sales during the past six months. The ethical dilemma that I am faced with is that my boss has also asked me to account for the 15% of products that are typically returned due to defects and other reasons in our sales even though he knows that this will overstate our sales for the past six months by 15%. I am running out of time and I need to make a decision. First I am going to...
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...Yahoo, Warren Buffett and $1 Billion Contest Eric J. McGlashing Feb 10, 2014 TOPICS: Insurance, Risk and uncertainty SUMMARY: A lawsuit involving Yahoo sheds light on the insurance policies that enable contest prizes like the $1 billion Warren Buffett is offering to anybody who predicts the winner of every March Madness basketball game. CLASSROOM APPLICATION: Students can struggle with framing the problem of the uncertainty involved in calculating expected payment and the risk involved in offering a prize for correctly picking the NCAA basket tournament bracket winners. Students can work on a simplified problem of a four-team tournament (as opposed to a 64-plus team tournament) and a small number of fans choosing the winners. Students should be forced to think about the distributions of the fans' probabilistic beliefs about the game winners. QUESTIONS: 1. (Advanced) Suppose in a tournament game between teams i and j that team i is expected to beat team j with probability p. What is the value of p for each of the tournament's games that make it least likely that a gambler can correctly pick of the tournament's winners? 2. (Introductory) Suppose in round 1 of the tournament that one and only one lower-seeded team is going to win a game. What is the probability that a gambler will correctly pick the one team? 3. (Advanced) What is the probability that any one fan will correctly pick all bracket winners? What is the probability that at least one of four fans...
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...Case 1: Warren Buffett 1995 Question 1: Warren Buffett's (Buffett) track record as a value investor and sheer financial strength has earned him an incredibly valuable reputation within the financial industry. Being an anomaly in the investment world; when he talks – the market follows. This is noticeably seen in the increase in equity of $718 million. ------------------------------------------------- Question 2: GEICO Outstanding shares April 30, 1995: 67.89 million, of which 34.22 million owned and 33.67 million purchased at $70; total price $2.3 billion. A Capital Asset Pricing Model (CAPM) derived cost of equity equaled 10.99% percent via a risk-free rate of 6.86 percent, a beta of 0.75, and an equity risk premium of 5.5 percent. k = 6.86 + 0.75 ((5.5)) = 10.99% Using Value Line’s forecast & the above discount rate and share information: the following low end & high end NPV are calculated: Low end: -$335.57 High end: $389.89 For methodology in calculation of intrinsic value refer to ‘1995-Question 2’ in the accompanying “excel“spreadsheet for the analysis. Using Value lines cost of equity; the investment yields a negative Net Present Value (NPV) on the low end. The investment will not add value to the firm and the acquisition of GEICO doesn’t seem to be a good one. The high end range yields a positive NPV showing the investment rather is rather a prudent one. The discount rate used is highly subjective and is influenced by the risk premiums chosen...
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...1. Be prepared to discuss each aspect of Warren Buffet's investment philosophy. Do you agree or disagree? A basis in financial theory is preferred but not required tomorrow. Berkshire should continue its strategy based on Buffett's investment philosophy of purchasing undervalued assets. Over the past 40 years, Berkshire has increased shareholder value by an average of 21%, twice the average of the S&P 500 over the same period. Berkshire has a time tested set of rules for the best types of companies to acquire, namely to purchase businesses for less than they are worth. Berkshire must continue this strategy in order to increase shareholder wealth. Specifically, Buffett must use his investment philosophy that has made him so successful. He should continue to seek companies to invest or purchase that he understands and can purchase at a discount. The economic slowdown is an opportunity for Berkshire to find undervalued assets. Within the U.S. Buffett could look at the financial industry. He could also look at purchasing assets in a few years when the housing industry recovers. Given Buffett's investment philosophy, this would be an ideal time to purchase undervalued assets and hold them for a long time. Buffett should also be looking outside of the U.S. for investment opportunities. Brazil, India, Europe, and China are all opportunities. China's stock market is down significantly this year. This may be an excellent time for Buffett to search for bargains. Buffett...
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...My company has offered low income services to the latino community in Philadelpia. In terms of culture, my company has been able to relate with Latino community within the city which has made their name geat and reputable. Having the capability to communicate and offer services to a culture of people that, in most cases, are overlooked strengthens the moat. Prem Jain stated that, its important to invest in a monopoly at it’sbeginning stages (Jain, 2010). He further explained how Warren Buffet believed that the increased competitive advantage drives profitability (Jain,...
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...Case 1 Warren E. Buffett, 1995 How is Berkshire Hathaway’s business composition from Exhibit 1 different or similar today? Be specific. Provide an overall statement to describe Berkshire Hathaway’s performance over time compared to the S&P 500. Can you discern a trend in the investment decisions of Mr. Buffett and are his decisions consistent with the principals learned from his mentor Dr. Graham? Based on the types of company’s that BK now owns, have the Acquisition Criteria been held to, modified, expanded upon? Is there something more to his theories? Comment on the quote “all you need to know to become a successful investor is two courses, (1) A course on how to value companies and (2) a course on human behavior”. How does Buffet’s philosophy statements on page 19 and 20 compare to what you have learned so far in your other management classes or personal experiences? What does the advice that Buffet gave the University of Florida students mean to you? Select 2 quotes on page 22 and comment on why they are meaningful to you. How has Mr. Buffet taken advantage of the recession of the past 4 years? Comment on Mr. Buffet’s quote “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”. By use of research, how has Buffet and his company applied this statement with their current actions? Case 2 INTUIT Your textbook on page 19 makes reference to the fact that most entrepreneurs learn...
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